A Shocking Truth for Law and Economics: Consumer Welfare Explains the Internal Market for Electricity Better Than Total Welfare

Abstract

This chapter challenges the use of total welfare as the axiological assumption adopted by economically-informed legal scholarship in the field of electricity. To do so, it demonstrates that the efficiency hypotheses can be grounded in two different economic rationales: the traditional one based on total welfare; and an alternative one based on consumer welfare. To challenge the uncritical endorsement of total welfare, the chapter chooses the competition pillar for the EU internal market for electricity as a case study and shows that consumer welfare better explains its economic rationale. This finding proves that the economically-informed legal scholars are wrong in considering total welfare an unquestionable starting point for their research. This will likely be a ‘shocking truth’ for law and economics scholars. The argument is articulated in four steps. The first step builds the methodological foundations. It describes two types of explanatory claims, one external and the other internal to legal discourse, and discusses the superior relevance of the latter to legal practice. The second step lays the analytical framework. It identifies points of divergence between the two efficiency hypotheses, total and consumer welfare, with a focus on electricity markets. The third step reviews the economically-informed legal scholarship and the economic one on the regulation of electricity markets. It shows that scholars endorse total welfare, consumer welfare, and even both. The fourth and final step enters the realm of the EU internal market for electricity and proves that the economic rationale of legal materials and legal discourse is better explained by consumer welfare. This finding supports our alternative efficiency hypothesis based on consumer welfare.